Regional Economic Integration

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Objectives Define different forms of economic integration and how it affects international business Describe the static and dynamic effects and the trade creation and diversion dimensions of economic integration Present regional trade groups (NAFTA, EU) Describe Cooperative Agreements and the rationale for their creation and success Examine the Development of World Trading Approaches

Regional Economic and Political Integration Major Forms Free Trade Area Customs Union Common Market Complete Economic Integration (Economic Union) Political Union

Regional Economic and Political Integration Major Forms Free Trade Area Tariffs are abolished among members-countries Each country can determine their own trade policies toward nonmembers. Each member-country maintains its own external tariffs on imports from nonmember countries Customs Union A Free Trade Area - PLUS member-countries add a common external tariff

Regional Economic and Political Integration Major Forms Common Market A Customs Union PLUS the abolition of restrictions on the mobility of capital and labor among member-countries Complete Economic Integration (Economic Union) Involves a high degree of political integration as member-countries surrender important elements of their sovereignty No barriers among members, common external policy, common monetary and fiscal policy, harmonized tax rates and common currency.

Political Union Economic Integration Has a coordinating bureaucracy accountable to all citizens.

ECONOMIC INTEGRATION The Effects of Integration trade creation, resources shift from the least - to the more-efficient producers / companies as trade barriers fall between the members A dynamic effect is that as markets grow, companies achieve economies of scale. Production shifts to more efficient producers for reasons of comparative advantage Efficiency increases because of competition thus the less efficient will fail Consumers access wider variety of goods at lower prices, higher quality products

ECONOMIC INTEGRATION The Effects of Integration trade diversion As a result of COMMON external barriers trade shifts from more efficient external sources to less efficient suppliers within the bloc. discrimination against outside producers. Diverts trade to less-efficient producers within the country or group

Regional Economic Integration EI on a regional geographic basis Regional integration has political, social, and economic effects FACTORS supporting the creation of REI Distance goods need to travel between countries is short Consumers’ tastes are likely to be similar Distribution channels can be easily established in adjacent countries Neighboring countries may have common history and interests 7-3

Regional Integration Economic Allow countries to specialize in products they produce efficiently. Easier to gain agreement than GATT/WTO. Role of FDI is enhanced. Exploit gains from free flow of goods and services and investment. Political Creates incentive for political cooperation. Reduces potential for violent confrontation. Enhanced clout to deal with ‘superpowers’.

The EU

EU Membership Conditions (a) Legal requirements European integration has always been a political and economic process that is open to all European countries prepared to sign up to the founding treaties and take on board the full body of EU law. According to Article 237 of the Treaty of Rome ‘any European state may apply to become a member of the Community’. Article F of the Maastricht Treaty adds that the member states shall have ‘systems of government […] founded on the principles of democracy’.

EU Membership Conditions (b) The ‘Copenhagen criteria’ In 1993, following requests from the former communist countries to join the Union, the European Council laid down three criteria they should fulfil so as to become members. By the time they join, new members must have: stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union; the ability to take on the obligations of membership, including support for the aims of the Union. They must have a public administration capable of applying and managing EU laws in practice.

EU Membership Conditions (c) The accession process The entry negotiations are carried out between each candidate country and the European Commission which represents the EU. Once these are concluded, the decision to allow a new country to join the EU must be taken unanimously by the existing member states meeting in the Council. The European Parliament must give its assent through a positive vote by an absolute majority of its members. All accession treaties must then be ratified by the member states and the candidate countries in accordance with each country’s own constitutional procedures. During the years of negotiation, candidate countries receive EU aid so as to make it easier for them to catch up economically. For the enlargement of the 10 countries in 2004, this involved a package of €41 billion aimed mainly at funding structural projects to allow the newcomers to fulfil the obligations of membership. http://europa.eu/abc/12lessons/lesson_3/index_en.htm

The European Union: 493 million people – 27 countries Member states of the European Union Candidate countries

Eight enlargements 1952 1973 1981 1986 1990 1995 2004 2007

EU population in the world Population in millions, 2007 1322 497 301 128 142 EU China Japan Russia United States

The area of the EU compared to the rest of the world Surface area, 1 000 km² 16 889 9327 9159 4234 365 EU China Japan Russia United States

How rich is the EU compared to the rest of the world? 37 300 10 793 27 800 10 035 24 700 3676 10 000 6 400 1 326 468 EU China Japan Russia United States EU China Japan Russia United States Size of economy: Gross Domestic Product in billion of euros, 2006 Wealth per person: Gross Domestic Product per person in Purchasing Power Standard, 2007

Types of fuel used for making energy in the 27 EU countries, 2005 Energy sources in a changing world Types of fuel used for making energy in the 27 EU countries, 2005 Import dependency: share of fuel imported from outside the EU-countries, 2005 100% 82% Gas 35% Oil 37% 57% 50% 39% Nuclear 14% Coal 18% Renewables 7% 0% Coal Oil Gas Nuclear (uranium) Renewables All types of fuel

The EU – a major trading power Share of world trade in goods (2006) Share of world trade in services (2005) EU 17.1% EU 26% Others 44.9% Others 50.5% United States 16% Japan 6.6% United States 18.4% China 9.6% China 3.8% Japan 6.9%

The euro – a single currency for Europeans Can be used everywhere in the euro area 4Coins: one side with national symbols, one side common 4Notes: no national side EU countries using the euro EU countries not using the euro

The European Union Other Issues Problems of Expansion Relatively lower income countries Higher dependence on agriculture New democracies Financial pressure on structural assistance fund and Common Agricultural Policy Governance Other Issues Challenge to companies: Establish a regional strategy before different national strategies

US EI Trade Agreements http://www.ftaa-alca.org/View_e.asp

USA – Trade Agreements http://www.ustr.gov/trade-agreements/free-trade-agreements NAFTA_Myths_Facts.doc http://www.sice.oas.org/trade/nafta/naftatce.asp http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf http://www.eagleforum.org/topics/NAU/

US Free Trade Agreements The United States has free trade agreements in force with 17 countries. These are: Australia Bahrain Canada Chile Costa Rica Dominican Republic El Salvador Guatemala Honduras Israel Jordan Mexico Morocco Nicaragua Oman Peru Singapore The United States has signed free trade agreements with Colombia, Korea, and Panama, but Congress must enact legislation to approve and implement each individual agreement in order for them to go into effect. The United States is also in nenegotiations of a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement with the objective of shaping a high-standard, broad-based regional pact.

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NAFTA (JULY 2009 Est.) $38,400 $13,200 $46,400 $1.319 trillion CIA FACT Book https://www.cia.gov/library/publications/the-world-factbook/region/region_noa.html Population GDP GDP/Capita CANADA 33,487,208 $1.319 trillion $38,400 MEXICO 111,211,789 $866.3 billion $13,200 UNITED STATES 307,212,123 $14.27 trillion $46,400

Trade US- Canada-Mexico Canada’s exports to its NAFTA partners increased by 173 percent in value from pre-NAFTA levels. Exports to the United States grew from USD116.8 billion to USD316.8 billion, while exports to Mexico reached USD3.9 billion. U.S. exports to Mexico and Canada grew by 157 percent, from USD 142 .0 billion (USD 41.6 billion to Mexico and USD 100.4 billion to Canada) to USD 364.5 billion (USD 134.2 and USD 230.3 billion, respectively). Mexican exports to the U.S. grew by 392 percent, reaching USD212.3 billion. Exports to Canada also grew substantially from USD1.5 to USD5.2 billion, an increase of almost 237 percent.

January 1, 2008 represents an important milestone in the trade and economic relationship between our three countries. On that day, the last scheduled NAFTA tariffs and quotas will be eliminated and North America will be joined in free trade.